Investment

Determinants:

· Expected rate of return: businesses buy capital goods only when they expect such purchases to be profitable

· The real interest rate: the financial cost of borrowing the money capital required to purchase the real capital

The curve is downsloping, reflecting an inverse relationship between the real interest rate and quantity of investment demanded.

In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production. Examples include railroad or factory construction. Investment in human capital includes costs of additional schooling or on-the-job training.

Refers to the expenditures by firms on new plants, capital equipment, intentories etc.

like all economic decisions, a firm’s decision in invest is a COST nad BENEFIT decision.

-Costs of investement: the interesest rate charged by the bank on a loan to buy new capital

-Benefit of investement: (ожидаемая норма прибыли) the expected rate of return the investment will earn for the firm

INVESTEMENT is determined by the following factors

expectations: of future sales and business conditions

technology: increase the productivity of capital, thereby encouraging new investment

business tax: higher taxes decrease the expected return on new capital, discouraging new investement

inventories: (производственные запасы) the existing large inventories will discourage new investement

25. Equilibrium GDP: Expenditures – Output approach.

Equilibrium GDP: Expenditures-Output Approach

· Look at Table 9-4, which combines data of Tables 9-1 and 9-3.

· Real domestic output in column 2 shows ten possible levels that producers are willing to offer, assuming their sales would meet the output planned.In other words, they will produce $370 billion of output if they expect to receive $370 billion in revenue.

· Ten levels of aggregate expenditures are shown in column 6.The column shows the amount of consumption and planned gross investment spending (C + I_g) forthcoming at each output level.

o Recall that consumption level is directly related to the level of income and that here income is equal to output level.

o Investment is independent of income here and is planned or intended regardless of the current income situation.

· Equilibrium GDP is the level of output whose production will create total spending just sufficient to purchase that output.Otherwise there will be a disequilibrium situation.

o In Table 9-4, this occurs only at $470 billion.

o At $410 billion GDP level, total expenditures (C + I_g) would be $425 = $405(C) + $20 (I_g) and businesses will adjust to this excess demand by stepping up production.They will expand production at any level of GDP less than the $470 billion equilibrium.

o At levels of GDP above $470 billion, such as $510 billion, aggregate expenditures will be less than GDP.At $510 billion level, C + I_g = $500 billion.Businesses will have unsold, unplanned inventory investment and will cut back on the rate of production.As GDP declines, the number of jobs and total income will also decline, but eventually the GDP and aggregate spending will be in equilibrium at $470 billion.

· Graphical analysis is shown in Figure 9-9 (Key Graph).At $470 billion it shows the C + I_g schedule intersecting the 45-degree line which is where output = aggregate expenditures, or the equilibrium position.

o Observe that the aggregate expenditures line rises with output and income, but not as much as income, due to the marginal propensity to consume (the slope) being less than 1.

o A part of every increase in disposable income will not be spent but will be saved.

o Test yourself with Quick Quiz 9-9.

26. The multiplier effect

- The change in investment leads to a larger change in output and income. This result is called - the multiplier effect.

- It determines how much larger is the ratio of a change in equilibriu GDP to the initial change in investment.

Mi = (tr) GDP / (tr) I

or

Mi = 1 / (1 - MPC) = 1 / MPS

I = 100 MPC=0,8

Доход C S

100р 80 20

80р 64 16

64р 51,2 12,8 геометрическая прогрессия

в итоге сумма дохода в экономике - 500

потребления - 400

сбережения - 100

MI = 1/MPS = 1/ 1-0,8 = 1/0,2 = 5

income appoach

wage and compensation rent

interest

corporate profits and properties income

indirect business tax

wage include payments by employers into social insurance pension health funds for workers

rent consits of payments reveived by suppliers of property resources

interest - money income payments flowing form prival business to supplies of money

Proprietor Income - net income of unicorporated business (sole proprietorships and partnerships)

Corporate profits may be:

collected as corporate income taxes distributed as dividents

retained as undestributed pofits

27. Equilibrium GDP: Leakage – Injections.

Equilibrium GDP: leakages-injections.

S=I approach

• A part of DI may may be saved- not consumed- by households.

• Saving represents a leakage(withdrawal) of spending from income- expenditures stream.

• Saving is what keeps consumption short of total output or GDP.

• Investment is an injection of spendding into the income- expenditures stream.

• Investment- a potential replacement for leakage of saving.

• Equilibrium GDP- at the point where the amount households save and the amount business plan to invest are equal